Market Review and Outlook 1st Quarter 2012
Mixed economic data, concerns about Europe, and supply-demand dynamics continued to drive the municipal bond market’s performance during the first quarter of 2012. Although rates moved only modestly upward from year-end to March 31st, the volatility within the quarter was far more dramatic as 10-year AAA municipal yields surged over 60 basis points from January 18th (1.67%) through March 20th (2.33%). Much of this volatility can be attributed, in part, to a surge in supply in March as issuers took advantage of the historically low rate environment. Despite the heavier issuance, demand continued to outpace supply and municipal bond fund flows remained decidedly positive. In the first quarter alone, there were four weeks with fund flows in excess of $1 billion. Other themes impacting municipal portfolios included the outperformance of lower quality bonds and the changing slope of the yield curve, which steepened in February, but then flattened significantly in March.